Question

Pattern Corporation acquired all of Science Company's outstanding stock on January 1, 2016 for $600,000 cash. Science Company's
accounting records showed net assets on that date of $470,000 although equipment with a 10-year remaining life was undervalued
on the records by $90,000. Any recognized goodwill is considered to have an indefinite life. Science Company reports net income
in 2016 of $90,000 and $100,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years.
The trial balances for each company for the year ending December 31, 2018 are below:
	Unconsolidated		Entries
	Pattern	Science	C	S	A	I	D	E	Consolidated
Current assets	300,000	100,000							400,000
Equipment	900,000	600,000							1,500,000
Building	800,000	400,000							1,200,000
Land	600,000	100,000							700,000
Goodwill									-
Invest in sub	600,000		132,000						732,000
Liabilities	(900,000)	(500,000)							(1,400,000)
Common Stock	(900,000)	(300,000)							(1,200,000)
Dividends	120,000	20,000							140,000
Retained Earnings 1/1/18	(1,100,000)	(320,000)	(132,000)						(1,552,000)
Revenues	(800,000)	(500,000)							(1,300,000)
CGS	100,000	150,000							250,000
Depreciation	300,000	250,000							550,000
Investment Inc	(20,000)	-							(20,000)
Totals (should be zero in each column)	-	-	-	-	-	-	-	-	-
a.  Complete the consolidating schedule above to consolidate the trial balances. Note that the first entry "C" has already been completed for you.
b.  How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?
c.  Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
d.  If the parent company had used a different method of accounting for this investment, how could that method have been identified?
e.  What would be Pattern's balance for retained earnings as of January 1, 2018, if each of the following methods had been in use?
Initial value method, Partial equity method, Equity method

Answer 1

ANSWER

Unconsolidated		Entries
	Pattern	Science	C	S	A	I	D	E	Consolidated
Current assets	300000	100000							400000
Equipment	900000	600000			72000			(9000)	1563000
Building	800000	400000							1200000
Land	600000	100000							700000
Goodwill					40000				40000
Invest in sub	600000		132000	(620000)	(112000)	(20000)	20000		0
Liabilities	(900000)	(500000)							(1400000)
Common Stock	(900000)	(300000)		300000					(900000)
Dividends	120000	20000					(20000)		120000
Retained Earnings 1/1/18	(1100000)	(320000)	(132000)						(1552000)
Revenues	(800000)	(500000)							(1300000)
CGS	100000	150000							250000
Depreciation	300000	250000						9000	559000
Investment Inc	(20000)					20000			0
Totals	0	0	0	0	0	0	0	0	0

Depreciation expense = book value of Pattern + book value of Science + amortization expense = 300000+250000+(90000/10)=$559000

Depreciation expense =$559000

Dividends declared = book value of Pattern = 120000

Revenues = book value of Pattern + book value of Science = 800000+500000=$1300000

Equipment= book value of Pattern+ book value of Science + excess allocation+ amortization expense(3 years) = 900000+600000+90000-(90000/10*3) = 1563000

Buildings= book value of Pattern + book value of Science = 800000+400000=$120000

Goodwill= purchase price of net assets-book value of net assets - excess allocated to equipment = 600000-470000-90000=40000

Common stock = book value of Pattern = 900000

Part B

No, doesn't affect consolidated totals but only internal reporting of parent.

The parent's choice for accounting methods for its investment does not affect the consolidated balances of depreciation, dividends declared, equipment, revenue, common stock, goodwill, buildings, revenues.

Part C

Initial value method

Currently, the parent company is currently using the initial value method for reporting. The parent's investment investment in subsidiary is equal to $600000 which is its original cost. Moreover investment income is equal to dividends declared by subsidiary.

Part D

The utilization of partial equity method would have indicated the investment income account at only an equity accrual of $132,000. The utilization of equity method would have indicated the investment income account at both the equity accrual of $132,000 and excess amortizations of $9,000 for a balance of $123000

Part E

	Retained earnings
Initial value method	$1100000
Partial equity method	$1250000
Equity method	$1232000

Initial value method = Beginning retained earnings of Pattern = $1190000

Partial equity method = Beginning retained earnings+ net income 2016 + net income 2017 - dividends = 1100000+90000+100000-(20000*2) = $1250000

Equity method = Beginning retained earnings+ net income 2016 + net income 2017 - dividends - depreciation expense 2016 - depreciation expense 2017 = 1100000+90000+100000-(20000*2)-(90000/10*2)

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